CSW Energy's Rtg Lowered to 'BBB'; Outlk to Stable.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire--

Dec. 16, 1999--Standard & Poor's today lowered its rating on CSW Energy Inc.'s (CSWE) $200 million senior unsecured debt to triple-'B' from triple-'B'-plus. The outlook has been revised to stable from negative.

CSWE is a wholly owned subsidiary of Central & South West Corp. (CSW--/--/`A-2'). The rating downgrade follows the downgrade of SEEBOARD PLC (triple-'B'-plus/Stable/`A-2')and CSW Investments (triple-'B'-plus/Stable/`A-2') on Dec. 7, 1999. The downgrade of SEEBOARD and CSW Investments reflects the reduced debt service ability of SEEBOARD as a result of an expected 30% reduction in revenues. The reduction in revenues will begin April 1, 2000 as announced by the U.K. electricity regulator.

CSWE develops, acquires, constructs, owns and operates power production facilities in the U.S. Currently, operating projects represent 978MW with a net ownership of 522MW. CSWE also has 1,070MW under construction. CSWE's rating depends on the creditworthiness of CSW International (CSWI), its guarantor, and ultimately on SEEBOARD, a regulated electric distribution company in the U.K., which provides CSWI with its major source of cash flow.

The rating reflects the following risks:

-- That an increase in leverage at CSWI or any intermediate holding company, including SEEBOARD may have a detrimental effect on CSWE.;

-- The mid speculative grade characteristics of the U.S. based independent power producer project portfolio;

-- Lack of operating history. The portfolio of projects is fairly new; and while some projects reached commercial operation in 1994-1995, they contribute minimally to overall cash flow. The major cash contributors have only just reached commercial operation or are still in the development phase;

-- Highly leveraged capital structure. As of Dec. 31, 1998, for CSWE alone, debt-to-total capitalization was 76%; and

-- The portfolio is not well diversified. For example, SEEBOARD contributes 50% of total combined (CSWE and CSWI) 10 year average cash flow.

However, the triple-'B'- rating is supported by the following strengths:

-- A guarantee from CSWI, which derives its credit strength from subsidiary SEEBOARD, the U.K. regional electric distribution company acquired by CSW in 1996;

-- Implied support from the ultimate parent company, which will continue to lend funds to both CSWE and CSWI to finance the start-up phase of projects or provide bridge financing on smaller acquisitions;

-- Support provided in the form of an expense support agreement between CSW and CSWE whereby CSW has committed to provide up to $136 million over the next five years for development expenses; and

-- Strong combined interest coverage ratios which average 5 times over the term of the notes under CSWE's pro forma financial statements.

CSWE lent the entire proceeds from the note issuance to CSWI in order for it to make an $80 million equity investment in Vale, which owns distribution assets in Brazil and a $113 million investment in a generation company located in Chile. Through the use of an inter-company loan, CSWE is able to repatriate funds in the form of interest payments without tax consequences.

OUTLOOK: STABLE

The more stable regulatory environment in the U.K. electricity industry and the stable, though limited cash flow from CSWE's domestic IPP projects allow Standard & Poor's to conclude that the outlook is stable. However, any downward movement in the ratings on CSW due to its merger with AEP, any further decline in the ratings for SEEBOARD or CSW Investments or any additional debt incurred at any intermediate holding company may have a negative impact on the ratings for CSWE. Limited cash flow diversity will limit ratings upgrades even if SEEBOARD's debt rating were upgraded, Standard & Poor's said. --CreditWire